Banking on Inflation Going Downhill

All of a sudden, we are hearing more chatter about deflation. Yes, that's right: deflation. The story line is that the regional banks will respond to the SVB debacle by lending less to lots of middle market businesses, especially if depositors move their funds to the money center banks or to the money markets. The result will be a credit crunch and a hard landing forcing companies to cut their prices and labor costs by cutting wages and payrolls.

We've often observed that recessions are caused by financial crises triggered by the tightening of monetary policy that turn into credit crunches.  We aren't convinced that the SVB crisis will morph into a credit crunch. But we will track the weekly data on loans on the books of large and small banks. During the March 1 week, loans and leases at the banks totaled $12.1 trillion, consisting of $6.5 trillion at large domestic banks and $4.5 trillion at small domestic ones (chart). They were all at record highs. There’s clearly no sign of a credit crunch in the loan data, so far.